Deere Earnings Better-Than-Expected, but Don't Hold Your Breath

Shares of heavy equipment maker Deere (DE) skyrocketed in morning trading on Wednesday, following Wall Street-beating results for the most recent quarter. But as investors rewarded the tractor company for the earnings surprise, pushing the stock up to new 52-week highs near $102 per share, there's a much more somber message in the earnings release that should have yet another industry concerned.

For the fourth quarter, Deere recorded net income that fell to $285.3 million, or 90 cents per share, from $351.2 million, or $1.08 per share, in the fourth quarter of 2015. But analysts had been expecting EPS of only 40 cents for the latest quarter.

Revenue also took a tumble, but was still better than expected. Deere noted this metric was down by 3% year over year, to $6.52 billion. Still it was better than the consensus estimate of $5.38 billion.

But Deere also announced a depressing forecast for fiscal 2017. The company expects sales of its equipment to decrease by about 1%, including a year-over-year plunge of 4% in the first quarter. Deere blamed weak prices for commodities and an accompanying drop in farm income for a projected 5% to 10% decline in full-year 2017 large and small equipment sales to the U.S. agricultural and turf industries. In the European Union, it's expecting industry sales to drop by 5%.

The fact is, the farming industry has been plagued by a perfect combination of relatively high levels of agricultural debt, crop surpluses, and a decrease in farmland values. That mix has led to one of the worst downturns in agriculture since the Great Depression.

And judging from Deere's earnings Wednesday, this farm recession isn't expected to end anytime soon.

According to Jeffries analyst Stephen Volkmann, the market-beating results that Deere recorded for the fourth quarter were due to the company having a better handle on its business in the difficult climate, rather than an improvement in the industry. "It was all kind of internal -- either pricing or cost cutting," he said. "It's not that the cycle is turning; it is that they are managing it better than before."

Certainly, investors in Deere, as well as in agricultural machine-making rivals such as Caterpillar and AGCO, have reason to be concerned. Don't expect any profits in the short term from these companies so dependent on the farming industry.

On the other hand, this also does not bode well for the restaurant industry. Analysts have declared us on the cusp -- or already within -- a restaurant recession, as sales at even the most popular chains such as McDonald's and Panera Bread see slowing or stagnant growth. One of the biggest reasons for this slump? Food is just too cheap on the supermarket shelves, and Americans are choosing to fix dinner at home rather than dining out.

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With a continuing farm recession, those produce and grocery prices certainly aren't going to increase. And the restaurants, along with agriculture, will continue to suffer.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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